China's credit boom is spiralling out of control, warns Fitch

China's massive credit boom is rapidly growing to unsustainable levels and
over-extended financial institutions risk being pushed over the edge by
rising interest rates, according to rating agency Fitch.

According to Fitch's calculations, annual new credit in China climbed to 21 trillion yuan (£2.15 trillion) in August, up from 19 trillion yuan in August 2012, the fifth year that net new credit has exceeded more than one-third of GDP.Photo: Reuters

"To the extent people think there's deleveraging underway, or growth is coming back in a strong way - nothing has really changed," said Charlene Chu, senior director at Fitch Ratings. "The bottom line is we continue to be in the middle of this very large credit boom."

According to Fitch's calculations, annual new credit in China climbed to 21 trillion yuan (£2.15 trillion) in August, up from 19 trillion yuan in August 2012, the fifth year that net new credit has exceeded more than one-third of GDP.

"It is difficult to see how a situation in which credit – already twice as large as GDP – continues to grow by twice as fast can be sustainable indefinitely," the report said.

The rating agency calculated that even in a positive scenario - where credit growth slowed by 2 percentage points to 12pc annually, while nominal GDP held steady at 11pc, the country's credit-to-GDP ratio would rise to 250pc by the end of 2017, almost double pre-crisis levels in 2008.

Fitch said a more realistic scenario would result in ratios above 270pc by the end of 2017.

It said that while China's "solid policy record" and large state-owned corporate sector meant it was in a better position to manage high leverage because it had greater control over the system, it added: "no financial system can sustain rising leverage indefinitely."

Fitch highlighted that much of the new credit was being used to roll-over existing loans, which would not create growth. It said problems could arise if financial conditions tightened, leaving borrowers struggling to service debts and leading to defaults or a crisis.

The rating agency also warned that the interest rate being paid by borrowers on loans was "substantial and climbing". According to Fitch, total interest due on debt has risen to 12.5pc in 2013, from 7pc in 2008. Fitch warned the figure could rise to 22pc in 2017.

"Such high interest and debt may ultimately overwhelm borrowers – leading to spending cuts, slower growth, and financial sector asset-quality issues," Fitch said, adding that this could undermine efforts by the Chinese government to expose itself to market forces, such as liberalising interest rates.

Several analysts, including the International Monetary Fund (IMF), have warned that the explosive credit growth that has helped to drive China's economic rebound also posed a systemic risk to the financial sector.

In May, David Lipton, the IMF’s deputy managing director, said the rapid rise in lending increased the risk that some investments might be of poor quality and borrowers might default.

Separate data on Tuesday showed that house prices in China climbed 8.3pc in August on an annual basis, from 7.5pc in July, while prices in the country's three biggest cities - Beijing, Shanghai and Shenzen - jumped 18pc.

The sharp rises have stoked fears that China’s property market is veering into dangerous bubble territory, though officials dismissed their concerns on Tuesday.

Liu Jianwei, an analyst with the official statistics bureau, said the headline numbers masked wide disparities between China's regions. Mr Liu said while price increases averaged between 18 and 20pc year-on-year in China's biggest cities, in some parts of the country prices had risen by just 6pc.